Australia’s boom in data centre investment will deliver opportunities and challenges for the nation’s construction sector, a panel session has heard.

On September 17 and 24, Oxford Economics Australia hosted its Economic Outlook/Building & Construction Conference in Sydney and Melbourne respectively.

During the event, a panel session explored the opportunities and challenges for the construction sector with regard to the current boom in data centre investment.

Panellists included Oxford Economics Australia economists Timothy Hibbert, Head of Building & Property Forecasting; Alex Hooper, Head of Climate & Energy Economics; & Nicholas Fearnley, Head of Global Construction Forecasting.

The session was hosted by Adrian Hart, Director of Infrastructure Construction at Oxford.

The discussion came as Australia is undergoing a boom in new data centre investment as tech giants and other players seek to scale up their offering in artificial intelligence (AI).

Over a six-year period, Oxford forecasts that the annual dollar value of construction work done on data centres will quadruple from less than $1 billion in 2021/22 to reach almost four billion by 2027/28 (2022/23 constant dollar terms).

The boom is concentrated across Sydney and Melbourne, where Oxford analysis suggests that 137 data centre construction developments are either possible, under construction or completed.

Opportunity and Challenge

As mentioned above, the session explored the opportunities and challenges which are associated with the current boom from a construction sector viewpoint.

Several themes stood out:

(1) Investment bubble or real boom?

A key question involved risks to the above forecast and whether or not the current investment cycle in data centre development is a bubble.

On the last point, Hibbert says that he is ‘walking a fine line’.

Whilst the overall outlook is positive, he says that the forecasts involve a ‘pretty high band’ in terms of potential outcome ranges. He says that and significant risks to the outlook are present in terms of both demand and supply considerations.

Hooper, however, does not see a bubble.

She says this view is based on an analysis not only of Oxford’s database of construction activity but also a recent project which she undertook that looked at requests to connect new data centres to the energy network – something which focuses more closely on projects with firmer prospects.

“Our view after analysing that data is that there isn’t necessarily a bubble because it’s unlikely that these (data centre projects) will go ahead or get financing without end customers,” Hooper said.

“There are some suppliers or developers who can go ahead without an end customer from a financing perspective, but they’re the ones who are credible and have their end customers already there.

“So our view at the moment is that there isn’t a bubble.

“But there is certainly a huge amount of activity waiting in the wings, so if AI does really take off, you have this massive pipeline (of projects) that can react pretty quickly.”

2. Energy and water constraints

As more data centres come online, a critical challenge will involve catering for the massive requirements of these projects in terms of energy and water demand.

This is important as already massive energy requirements are expected to move to another level as power hungry AI algorithms expand whilst large volumes of water are needed to cool the data centre servers.

The significance of this should not be underestimated.

Over the five years from FY25 until FY30, the annual amount of electricity which is consumed by data centres could expand by more than threefold from 3.9 terawatt hours (or 2 percent of the current National Electricity Market) to 12.0 terawatt hours, according to a report which Oxford Economics prepared for the Australian Energy Market Operator.

In Ireland, data centres already account for more than one fifth of the nation’s overall energy consumption.

The effect will be concentrated in Sydney and Melbourne, where the boom in data centre development is taking place.

According to Hooper, the degree to which this will constrain new development activity will depend upon government actions.

In New South Wales, she applauds the establishment of the Investment Delivery Authority to accelerate approvals relating to data centres, the energy transition and tourism.

In Victoria, however, she talks of a backlog of requests to connect to the energy network.

Overseas, Hooper notes that large data centre companies such as Amazon, Google and Microsoft are building their own energy generation assets.

However, Australia is yet to move significantly in this direction.

In terms of usage efficiency, Hooper observes that high costs are spurring innovation in the energy space.

With respect to water, however, relatively low costs mean that usage efficiency efforts (such as use of wastewater) are less common and are mostly driven by ESG targets.

3.Contractor capacity

Another potential constraint which may emerge as more projects enter construction is the capacity of the market to deliver upon new developments.

Asked about this, Fearnley acknowledges that this could indeed emerge as a potential concern.

He points out that data centre construction is largely dominated by tier one and tier two commercial builders, with the likes of Lendlease and Multiplex being particularly prominent.

Whilst the overall commercial building market is expected to remain relatively stable going forward, data centre developers will need to compete for contractors with other highly active sectors such as student housing and healthcare.

Potentially, this could lead to feasibility challenges on future projects as a growing backlog of work places upward pressure on delivery timeframes and costs.

Add in competition from international data centre construction projects along with growing levels of military investment and substantial demands are likely not just for labour but also for material resources such as computer chips.

4. Boom for electricians and plumbers

Asked about specific occupations that will benefit from the data centre boom, Hibbert says that electricians and plumbers are particularly well placed.

These trades will benefit not only from new projects but also the refurbishment of older facilities, Hibbert says.

He adds that Australia’s workforce is one of the key factors which makes the country an attractive destination for data centre development.

“In a way, it reminds me of full spec (specification) hospitals,” Hibbert said.

“The plumbing and electrical type trades ae going to be in hot demand from a lot of this data centre work.

“You can already see this in some of the listed companies who are getting large electrical contracts for data centre fitout projects.

“They are very, very large (contracts) and there is going to be plenty more of that work to come.

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